Thursday, August 1, 2013

Raising the Minimum Wage at Walmart and McDonalds’s

Fast-food workers have received a lot of publicity for staging one-day "strikes" and demanding a dramatic increase in their wages. Most earn at or near the minimum wage of $7.25 per hour. This article by Matt Nesto on Yahoo Finance is typical of the reporting.

"You could call it the French fry revolution, as fast food workers from seven cities take to the streets this week, demanding to be paid a living wage of $15 an hour from the restaurants that employ them."

The typical commentary usually includes the implication that if you earn that little then you are incapable of understanding the issues involved.

"However reasonable the "living wage" idea may seem on the surface, labor costs are a very real and complex issue for all U.S. businesses, but especially those that employ the most unskilled workers."

In other words, if you require food stamps, Medicaid, free school meals for your children, and an Earned Income Tax Credit to survive, your problems are small compared to those of the people paying you that paltry salary.

"It would also come at a time when fast-food sales are already under pressure in the U.S. and struggling to grow...."

And who do owners think their fast-food customers are—the top 1%? Have they forgotten the Henry Ford principle: we need to make a product that our employees can afford?

And then there is the inevitable claim that the little, naive people will only end up hurting themselves.

"....industry watchers predict a dramatic wage increase would likely lead to shorter shifts or outright lay-offs, further automation (think self-check kiosks), as well as reduced opportunities for unskilled teenagers."

Why do we need an industry that caters to the needs of unskilled teenagers? Unskilled teenagers should be in school on their way to becoming skilled adults. If the fast-food industry could save labor with automation they would do it, and as automation becomes cheaper they will do it. The workers realize that they are being told "if you work for this unsustainable wage, it will be a little longer before we are able to fire you."

Finally, there is the bizarre claim the fast-food workers actually have it better than they realize.

"Add in the fact that many so-called quick serve restaurant workers are already paid above the minimum wage, as well as the fact that opportunities abound for motivated employees to advance from the bottom rung of the labor ladder, and this effort to move fast food forward, could end up setting a lot of people backwards."

So these minimum-wage workers are going to foolishly put at risk all those opportunities for fame and fortune that producing a hamburger can provide.

Raising the salary of these workers would bring the fast-food industry to its knees and cause economic chaos. Massive unemployment would follow. Right?

It is not that simple.

Fast food enterprises have been trying for decades to minimize wage expenses as a fraction of revenue. They have become rather good at it. An article by Clare O’Connor at reports on the activities of an enterprising student named Arnobio Morelix at the University of Kansas, School of Business. He analyzed McDonald’s annual reports and concluded that doubling all wage expenses would require McDonald’s to increase its revenue by 17% to maintain its profit level. That is interpreted as requiring an increase in price of 17% on its products.

"Morelix’s take: If McDonald’s workers were paid the $15 they’re demanding, the cost of a Big Mac would go up 68 cents, from its current price of $3.99 to $4.67."

"A Big Mac meal would cost $6.66 rather than $5.69, and the chain’s famous Dollar Menu would go for $1.17."

Note that the doubling of wage expenses included a doubling of benefits also; and it covered all employees including the CEO and his current $8.75 million salary.

"The research assistant said his math is based on increases in salaries and benefits for every McDonald’s worker, from minimum wage line cooks paid $7.25 an hour to CEO Donald Thompson, who made $8.75 million in 2012."

This approach provides an upper bound to the cost of implementing a minimum wage of $15. In that case, benefits would not be doubled and many workers would see less than a factor of two change in wages. Many would see no wage gain at all.

For the purposes of argument, let’s assume that a $15 minimum wage requires a blanket 10% price increase to maintain the status quo. And since we are talking a universally applied minimum wage, all McDonald’s competitors would face the same situation. Is a 10% price rise going to destroy the fast-food industry? Would a 17% increase destroy it?

Every time a fast-food worker receives food stamps, Medicaid assistance, an Earned Income Tax Credit, free school lunches for his/her children, or a housing subsidy, the taxpayers are contributing money to the industry’s profit line. How can the conservative, free-market economists who are so against legislating wage constraints, be, instead, in favor of public subsidies to an industry that has an unsustainable business model?

If there is an argument to be made against a much larger minimum wage, one will have to look beyond the McDonald’s of the world.

Another segment of the economy that employs large number of low-wage workers is the retail industry. It so happens that a detailed study of the impact on Walmart, the industry leader, of a $12 minimum wage has already been performed by the Center for Labor Research and Education at the University of California at Berkeley. This chart was included in the report:

The wage increase applied to Walmart’s US business would add a significant $3.2 billion to wage expenses for the company. However, that is only 1.1% of its US revenue. In order to maintain its profit level Walmart would have to raise its prices by a paltry 1.1%. If a $0.98 item now cost $0.99, would anyone even notice?

The same minimum wage would apply to all participants in the retail industry. Its application would not be likely to affect the competitive structure in the retail segment of the economy. It is difficult to see how a 1.1% price hike cold undermine the economy. As in the case of fast food, retailers who insist on a low-wage business model are receiving public subsidies in order to maintain those business practices.

There is no economic law that determines what a minimum wage should be. That has to be a decision made by citizens based on the kind of society they wish to live in. Other nations have made quite different decisions and have rather healthy economies. This chart of OECD data was provided by The Economist.

Even the other English-speaking nations—often as socially stingy as the US—put us to shame when it comes to putting a floor on wages.

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